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Unexpected productivity changes and unemployment

The two graphs reveal how changes in productivity can impact wages and unemployment
(a) Productivity is rising, increasing the demand for labor. Employers and workers become used to the pattern of wage increases. Then productivity suddenly stops increasing. However, the expectations of employers and workers for wage increases do not shift immediately, so wages keep rising as before. But the demand for labor has not increased, so at wage W 4 , unemployment exists where the quantity supplied of labor exceeds the quantity demanded. (b) The rate of productivity increase has been zero for a time, so employers and workers have come to accept the equilibrium wage level (W). Then productivity increases unexpectedly, shifting demand for labor from D 0 to D 1 . At the wage (W), this means that the quantity demanded of labor exceeds the quantity supplied, and with job offers plentiful, the unemployment rate will be low.

The late 1990s provide an opposite example: instead of the surprise decline in productivity in the 1970s, productivity unexpectedly rose in the mid-1990s. The annual growth rate of real output per hour of labor increased from 1.7% from 1980–1995, to an annual rate of 2.6% from 1995–2001. Let’s simplify the situation a bit, so that the economic lesson of the story is easier to see graphically, and say that productivity had not been increasing at all in earlier years, so the intersection of the labor market was at point E in [link] (b), where the demand curve for labor (D 0 ) intersects the supply curve for labor. As a result, real wages were not increasing. Now, productivity jumps upward, which shifts the demand for labor out to the right, from D 0 to D 1 . At least for a time, however, wages are still being set according to the earlier expectations of no productivity growth, so wages do not rise. The result is that at the prevailing wage level (W), the quantity of labor demanded (Qd) will for a time exceed the quantity of labor supplied (Qs), and unemployment will be very low—actually below the natural level of unemployment for a time. This pattern of unexpectedly high productivity helps to explain why the unemployment rate stayed below 4.5%—quite a low level by historical standards—from 1998 until after the U.S. economy had entered a recession in 2001.

Average levels of unemployment will tend to be somewhat higher on average when productivity is unexpectedly low, and conversely, will tend to be somewhat lower on average when productivity is unexpectedly high. But over time, wages do eventually adjust to reflect productivity levels.

Public policy and the natural rate of unemployment

Public policy can also have a powerful effect on the natural rate of unemployment. On the supply side of the labor market, public policies to assist the unemployed can affect how eager people are to find work. For example, if a worker who loses a job is guaranteed a generous package of unemployment insurance, welfare benefits, food stamps, and government medical benefits, then the opportunity cost of being unemployed is lower and that worker will be less eager to seek a new job.

Questions & Answers

what is Marginal analysis in Economics can sameone explain to me pliss
Gary Reply
facts and proof
Jibril
what matters in comsumption
Jibril
money speaks sales
Jibril
if marginal utility is coins then it analysis is choice of preference
Jibril
facts
Skills
what is money
Emmanuel Reply
hy
Usama
Money refers to the exchange value of goods and services.
Mbye
can you more explain it?
Usama
money is defined as any legal tender use in the exchange of goods and services.
Emmanuel
we can say commodity. A tool of change..
Baki
Money is a tool which is use to fullfil our needs and desires in the shape of goods and services.
Usama
good definition.
Baki
how does indirect tax increase the total expenditure?
Madishez
Money is any things which generally accepted as a medium of exchange by the general pubblic.
shakeel
indirect tax also the part of indirect expense. when tax occure then expenses increase
Usama
I can't understand this type becousr it's difficult for me that's why could you help me
Sheikh Reply
how will demand question will be like in an examination
ekua Reply
demand supply cycle
Omkar
like questions
Omkar
or different types of demand
Omkar
based on societal class structure
Omkar
or the most common and basic demands
Omkar
Give a simple explantion of the LAW OF DEMAND?
IT Reply
the law of demand says that all things been equal the higher the price the lower the quantity is demanded vise versa
Mensah
As price the increases the demand decrease
Gary
Income elasticity of demand
Shaan Reply
income elasticity of demand
Adjei
what
Omkar
what is labour force
ademu Reply
Labour force is the number of people who are actively and presently working in a country to increase the availability of goods and services.
Mbye
It refers to the active population available for work at a going rate.
Daniel
labour force is the number of people who are active and present working in a country to increase the availability of goods and services
Deborah
The law of diminishing returns States that "all other things being equal as more and more of a variable factor(labour) is employed on a fixed factor (Land) ,marginal product initially increases reaches a maximum and there after diminishes or fall
samuel Reply
how does exceptional demand occur
Esther Reply
It occurs, due to certain reasons, but to make my answers brief. Exceptional demand occurs when our earnings change. As the law of demand says the higher the price the lower the demand. However no matter how high the price is the person will still purchase the good due to his level of income.
Mbye
opportunity cost definitions
Surur
What do you mean mean by opportunity cost definition?
Mbye
OK thanks for the answer
Esther
Opportunity cost, means, in order to get something, you sacrifice something
Taha
Opportunity cost simply means, sacrificing one commodity at the expense of another.
Mbye
A production manager should continue to use inputs until the Marginal Product (MP) reaches at zero. Justify this statement.
Newtan
What is the scale of preference
Mbye
Esther👌
TSEKO
The law of diminishing returns
Mbye
Apply, PoE, Process of elimination, the 1st stage of production is not correct for the producer to produce because he has the option to increase his production level, so, eliminate that. In third stage, its not rational to produce because, Total output declines. Hence, it is only in the second
Taha
Stage, that the producer produces, also because, it is at this stage that the total output is maximum.
Taha
Hence proved
Taha
A production manager should continue to use inputs until the Marginal Product (MP) reaches at zero. Justify this statement.
Newtan
plz help
Newtan
thanks
Surur
deference b/n aggregate demand and aggregate supply
Surur
ok a production manager should continue to use it inputs until MP reaches zero because at that stage it is called rational stage. And at this stage when a producer produce anything he/she will get more output, aside that too the Total product (TP) will also be at it maximum.
samuel
Exceptional demand occurs due to demand conditions, and when it does not obey the law of demand.
samuel
e
mukul
A production manager should continue to use inputs until the Marginal Product (MP) reaches at zero. Justify this statement.
Newtan Reply
anyone help me Please
Newtan
does the richest experience scarcity?
elan Reply
how do you master a subject
elan
Yes, this is due to the fact that human wants are unlimited in number how ever he has everything his heart desires, he still have dreams of owning/having something else of a great value.
Tusajigwe
that's true,thank you tusajigwe
elan
why firm maximize profits when MC=MR
Abel Reply
The night before an economic exam you decide to go for outing instead of staying at home and studying for your exam.you get 50 percent on your exam as compared with the 70 percent that you normally score.
Muhammad Reply
join me
Abel
why do banks charge fees and charges?
Shirley Reply
What is Labour
Angela Reply
the service provide by the labourer is termed as labour.
Prtj

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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